Bank of Japan Eases Monetary Policy

By KEN BELSON

Published: January 21, 2004

TOKYO, Jan. 20—
The Bank of Japan, acting to firm up a sharply weakened dollar, unexpectedly eased monetary policy at a two-day meeting that ended Tuesday.

In a majority decision that echoed currency concerns expressed by finance officials in Europe, the policy board of Japan's central bank sought to restrain the rising yen, surprising analysts, given that the Japanese economy appears to be rebounding from its long recession without new help from the central bank.

The bank raised the limit on the amount it can leave in the money markets to 35 trillion yen ($327 billion), from 32 trillion yen, an increase of about $28 billion. It also lowered the standards needed to buy asset-backed commercial paper from small companies.

The steps are consistent with others that the bank has taken recently, but few analysts had expected any action as the economy enters its third year of recovery. The easing in policy came as government officials clamored for action that would help Japanese exports, while others criticized the bank's action as not decisive enough.

Policy makers are worried that the economy, which is still largely dependent on exports for growth, might be derailed if the yen continues to strengthen. A strong yen cuts into profits earned by Japanese companies overseas.

The Finance Ministry spent record amounts last year, and has reportedly spent more than 6 trillion yen ($56 billion) so far this year, to weaken the yen, which has gained 9 percent against the dollar since September. Last year, the government also set aside an extra 21 trillion yen ($196 billion) in a so-called foreign exchange fund spec Mortgage Bankers Association ial account.

The central bank's decisions ''appear to confirm that the B.O.J. is trying to move in lock step with the Ministry of Finance's very aggressive currency intervention policy,'' said Takuji Aida, an economist at Merrill Lynch Securities.

Speaking to reporters after the monetary board's announcement, the central bank's governor, Toshihiko Fukui, said the yen's recent rise could become a ''downside risk'' for the economy.

Mr. Fukui also said the central bank would keep foreign exchange rates in mind when setting policy. The statements were a turnaround from those of Mr. Fukui's predecessor, Masaru Hayami, who opposed intervening in foreign exchange markets and publicly favored a strong yen.

In addition to hurting Japan's big exporters, a strong yen makes imported goods cheaper for Japanese consumers. While a boon for consumers, lower prices also mean more deflation, which Japan's government is determined to end by 2006. Mr. Fukui said the central bank had decided to leave more money in the markets to show its commitment to ending deflation.

Despite the central bank's more activist stance under Mr. Fukui, many private economists question the effectiveness of the steps taken so far in his 10-month tenure. The Bank of Japan continues to buy back almost all the yen sold by the Finance Ministry, sterilizing it, in market parlance, rather than adding to the money supply, a move that could lower the value of the currency.

Also, the extra money that the central bank leaves in the money markets is not being used. Japanese banks have been reducing their new lending, not increasing it, as they try to improve the quality of their loan books. At the same time, demand for new loans has weakened as companies try to reduce the amount of debt they hold.

''Any concrete impact from today's decision will be limited,'' said Mamoru Yamazaki, an economist at Barclays Capital in Tokyo. ''Raising the target for current accounts will have little effect on the real economy at a time when funds are sitting in the banking system without reaching the private-sector economy.''

The limited effect of the central bank's moves is a sign that Mr. Fukui is more interested in appeasing, rather than truly helping, the government, economists said.

In fact, the central bank said in a report on Tuesday that the Japanese economy is recovering, and many indicators show economic activity at a six-year high. Mr. Fukui, according to his critics, is under pressure from lawmakers to help the government in its fight to weaken the yen.

''We see the move as mostly cosmetic and political,'' said Peter Morgan, an economist at HSBC Securities. ''The easing can be seen mostly as a symbolic gesture to the government that the B.O.J. is helping to 'fight deflation.'''